If China's Property Bubble Bursts, Short Canada

Andy Xie is predicting that the Chinese property bubble is set to burst.

As bank lending slows, “it’s very difficult to see this demand continuing,” Xie, formerly Morgan Stanley’s chief Asian economist, told Bloomberg Television in Hong Kong today.

The Chinese economy has done relatively well during the financial crisis, in part due to an aggressive stimulus program.  However, this has led to an explosion of credit, which has spawned another property bubble in China.  Credit and property bubbles rarely end well.

Growth in China has buoyed commodity markets.  Canada is a large exporter of commodities.  Canada has done relatively well compared to the US economy and the rest of the world, partly because Canada has been good but also partly because Canada has been lucky.  If the Chinese economy stalls because of a collapse in property prices, commodity prices will fall hard as China has been the global marginal buyer of all things coming out of the ground. 

Of course, Chinese demand for commodities is not the only driver of Canadian exports.  More than a third of all products and services made in Canada are exported to the United States.  However, it is my opinion that the recovery in the US will be anemic, and American stock markets may now be in the process of topping. 

(The thesis from which I am currently working is that after a large bounce, the stock market moves sideways for some time, perhaps two to five years.)

If this is the case, demand from the US will not be strong enough to offset the fall in demand for commodities from China.  Roughly half the Canadian stock market is comprised of energy and materials companies.  Canada will underperform in this scenario.

I am short Canada, and am short risk assets in general.  I believe that rallies are now to be sold rather than dips to be bought, and I plan on getting more aggressive on the short side into this rally.  I may be dead wrong, and if I am, I will quickly turn around my portfolio, and I likely won't tell you about it, or at least not in real time.

However, stocks are not cheap, the economy is weak, liquidity at best is capped and may soon be tightening, sovereign risk is rising, and the market may be tracing out the top of a range it may trade within over the next several years.

Comments

[CanadianLoonie]

Short Canada?

What about Australia?
Don't they rely on commodities even more than us?!

[David Smith]

Good point Loonie. Oz has to be more exposed to PRC in particular than Canada.

You could as well say "if China blows up, short Belgium" or whatever. Nothing against Belgium, just because the correlations converge to one in a big down market.

[writejesse]

why not just short China?

[alan smithee (nee kerry"]

toro, i think that we could see another flood of money flow into the system over the next year as the Dems try to buy the election. This should stall a crash, but should also delay making many of the changes that need to be made. the question, though, is whether the squeeze play continues.

[Dean]

Hey leave us, Australia, out of this! Just take it on the chin like good little canucks. Dirty dobbers!

Of course you're right, though I note Vancouver did take top spot in the least affordable cities. Who cares if Australia cities filled 12 of top 20 spots!

Yeah, Australia is screwed if China chokes, but at least we can admit it!

dobber http://www.urbandictionary.com/define.php?term=dobber while definition 1 also seems appropriate, def 4.2 is the one Australians use. To 'dob' someone in means to squeal on someone, to expose them, tell on them

[CanadianLoonie]

Personally, I prefer to be in Australia right now...

1.) Because the temperature is at least twice as high as it is in Vancouver

2.) Because it probably cost less than Vancouver

[Dean]

Yeah, but I don't have Whistler on my doorstep or that small day trip field close by. Envious I am.
Vancouver is a beautiful city, I liked the multi-cultural aspect and the people seemed relaxed. The rain...well after living in a drought for so long it was nice for a couple days, but sheesh does it ever stop?

[CanadianLoonie]

But I don't ski/snowboard so Whistler to me means little other than really beautiful sights on the way there. Plus, I hate the cold so I really don't want to be up there anyway right now.

As multicultural as we in Vancouver think we are, Toronto has us beat in terms of...quantity of diversity...but then again you'll be in Toronto. And it's still below freezing there right now.

And when it stops raining, it's probably June...or July...or August.

And isn't it raining to the point of flooding in Queensland?

[Jeff]

Hi Toro,
What instruments are you using to short Canadian markets? Is there anything that tracks as well with leverage as ES S&P 500 futures we have in the US to their markets thats liquid. The leveraged ETF funds in the us have too much slippage to track a large move over time it seems. Many thanks

[Toro]

I use the Horizons BetaPro double inverse bear ETF, ticker HXD.TO.

T.